VMware 2014 Annual Report Download - page 58

Table of Contents
delivered products or services, we must determine the fair value of each undelivered product or service using vendor-specific objective evidence
(“VSOE”). Absent VSOE, revenues are deferred until VSOE of fair value exists for each of the undelivered products or services, or until all
elements of the arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire arrangement
fee is recognized ratably over the performance period. Changes in assumptions or judgments or changes to the elements in a software
arrangement could cause a material increase or decrease in the amount of revenues that we report in a particular period.
VSOE of fair value for an undelivered element is generally based on historical stand-alone sales to third parties. In limited instances, for an
offering that is not yet sold, VSOE is the price established by management if it is probable that the price will not change when introduced to the
marketplace. In determining VSOE of fair value, we require that the selling prices for a product or service fall within a reasonable pricing range.
For multiple-element arrangements that contain software and non-software elements, we allocate revenues to software or software-related
elements as a group and any non-software elements separately based on relative selling prices using the selling price hierarchy. The relative
selling price for each deliverable is determined using VSOE, if it exists, or third-party evidence (“TPE”) of selling price. TPE of fair value is
based on evaluation of prices charged for competitor products or services sold to similarly situated customers. As our offerings contain
significant proprietary technology and provide different features and functionality, comparable prices of similar products typically cannot be
obtained and relied upon. If neither VSOE nor TPE of selling price exist for a deliverable, best estimate of selling price (“BESP”)
is used for that
deliverable. We use BESP in allocation of arrangement consideration. We determine BESP by considering our overall pricing objectives and
practices across different sales channels.
In the event we publicly announce specific features or functionalities, entitlements or the release number of a software upgrade that has not
been made available, and customers will receive that upgrade as part of a current software maintenance contract, a specified upgrade is deemed
created. As a result of the specified upgrade which we do not have VSOE of fair value, revenues are deferred on qualifying purchases that
include the current version of the product subject to the announcement until delivery of the upgrade.
Multiple-element arrangements may be bundled with a commitment to deliver a product that has not yet been made available. Revenues
specific to these arrangements is deferred until all product obligations have been fulfilled.
Professional services include design, implementation and training. Professional services are not considered essential to the functionality of
our products because services do not alter the product capabilities and may be performed by customers or other vendors. Revenues from
professional services engagements performed for a fixed fee, for which we are able to make reasonably dependable estimates of progress toward
completion, are recognized on a proportional performance basis assuming all other revenue recognition criteria are met. Revenues for
professional services engagements billed on a time and materials basis are recognized as the hours are incurred. Revenues on all other
professional services engagements are recognized upon completion.
Rebates
We offer rebates to certain channel partners, which are recognized as a reduction to revenues or unearned revenues. Rebates based on actual
partner sales are recognized as a reduction of revenues as the underlying revenues are recognized. Rebates earned based upon partner
achievement of cumulative level of sales are recognized as a reduction of revenues proportionally for each sale that is required to achieve the
target.
The estimated reserves for channel rebates and sales incentives are based on channel partners’ actual performance against the terms and
conditions of the programs, historical trends and the value of the rebates. The accuracy of these reserves for these rebates and sales incentives
depends on our ability to estimate these items and could have a significant impact on the timing and amount of revenues we report.
Returns
With limited exceptions, our return policy does not allow product returns for a refund. We estimate future returns at the time of sale and
record as a reduction to revenues or unearned revenues. Our estimate is based on historical return rates and the accuracy of these reserves
depends on our ability to estimate sales returns among other criteria. If we were to change any of these assumptions or judgments, it could cause
a material increase or decrease in the amount of revenues that we report in a particular period. Returns have not been material to date.
Accounting for Income Taxes
We have been included in the EMC consolidated group for U.S. federal income tax purposes, and expect to continue to be included in such
consolidated group for periods in which EMC owns at least 80% of the total voting power and value of our outstanding stock as calculated for
U.S. federal income tax purposes. The percentage of voting power and value calculated for U.S. federal income tax purposes may differ from the
percentage of outstanding shares beneficially owned by EMC due to the greater voting power of our Class B common stock as compared to our
Class A common stock and other factors. Each member
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